3) (20 marks) Stampede Corp. Is considering a project to supply 80 million postage stamps per year to Canada Post for the next five years. Stampede has an idle parcel of land available that cost $1mln. five years ago; the market price of the land today is $1.2mln. Stampede needs to install $3.1mln. worth of new manufacturing plant and equipment to produce the stamps; this plant and equipment will be depreciated straight-line to zero over the projects five-year life. The equipment can be sold for $600,000 at the end of the project. Stampede will also need $600,000 in initial net working capital for the project, and an additional investment of $50,000 in NWC every year thereafter. All cash invested in NWC will be recovered at the end of the project. The production costs are 0.75 cent per stamp, and the fixed costs are $800,000 per year. Stampedes tax rate is 34%; capital gains are taxed at half of the regular tax rate. Stampede has never borrowed funds in the past; it is 100 per cent equity financed. The market value of its common stock is $10 mln. The required return on the project is 15%.

a) What is the cost of land that you should include in your calculations? (3 marks)

b) Calculate the present value of the depreciation tax shield. (3 marks)

c) What bid price should you submit for the contract? (7 marks) Stampede is considering selling 2.3 mln of zero coupon bonds maturing in 4 years (selling for 68.3 per cent of face value) and using proceeds to repurchase its stock.

d) What will be the total value of Stampede after this financial plan is adopted? (4 marks)

e) What will be the total value of Stampede equity after the financial plan is adopted? (3 marks)